CBO ANALYSIS PROMPTS FAMILIAR DEBATE ON CARBON TAX MERITS

Tamar Hallerman
GHG Monitor
5/24/13

A May 22 report from the Congressional Budget Office examining the impacts of a carbon tax on the nation’s environment and economy appears to have reinforced the beliefs of lawmakers on both sides of the climate policy debate—prompting some Democrats to underscore their commitment to pushing for the regulation of carbon emissions, while a powerful Senate Republican said the analysis underscores how much such a scheme could hurt the economy. The report from the nonpartisan CBO does not make any policy recommendations, but concludes that a $20 per ton price on emissions could increase federal revenues by as much as $1.2 trillion during its first decade of operations, a “substantial amount of revenue,” according to CBO. The analysis says such a fee could also lower emissions by about 8 percent below business-as-usual levels. That could help avert the risk of “very large, or even catastrophic” future losses from climate change, according to CBO.

The report also estimates, though, that a $20 tax could raise gas prices by about 20 cents a gallon and disproportionately affect poorer households since a higher share of their budgets are often spent on carbon-intensive goods and services such as electricity and transportation. “Without accounting for how the revenues from a carbon tax would be used, such a tax would have a negative effect on the economy. The higher prices it caused would diminish the purchasing power of people’s earnings, effectively reducing their real (inflation-adjusted) wages,” according to CBO.

CBO concludes that ultimately the real economic impact of such a carbon tax would depend on how revenues are used. If lawmakers opt to shift the money toward budget deficit reduction or decreasing marginal rates on income or payroll taxes, those options would decrease the price’s total cost on the economy, according to the CBO. But if the revenues are shifted toward offsetting the cost of a tax on groups of people like low-income families, the approach would “tend not to reduce” the total economic cost of the tax. “Lawmakers would face a trade-off between the goals of helping those households most hurt by the tax and helping the economy in general,” according to the report.

Analysis Appears to Magnify Previous Beliefs

The results of the report appeared to have magnified the beliefs of lawmakers on both sides of the carbon tax debate. The office of Rep. Henry Waxman (D-Calif.), the ranking member on the House Energy and Commerce Committee, said the CBO analysis “makes a compelling case for inclusion of a carbon tax in any legislation to reduce the deficit or reform the tax code.” “CBO’s report shows that a carbon tax is a win-win policy,” Waxman said in a statement. “A properly designed carbon tax can help prevent potentially catastrophic changes to the climate and at the same time reduce the deficit or pay for tax reform.” Sen. Sheldon Whitehouse (D-R.I.), another vocal proponent of pricing carbon, said he hoped the report would “inspire more of our colleagues in Congress to consider carbon fee legislation.” “Carbon fee legislation could stop big polluters from unloading the costs of their pollution on the American public, and correct a flawed energy market,” Whitehouse said in a statement.

On the other side of the aisle, David Vitter (R-La.), ranking member on the Senate Environment and Public Works Committee, said the CBO analysis proves his own point that implementing a carbon tax would negatively impact the economy while not significantly reducing carbon emissions. “It’s not just energy prices that would skyrocket from a carbon tax: the cost of nearly everything built in America would go up,” Vitter said in a May 23 statement. “Let’s not lose sight of how big of a dud cap-and-trade was in 2009. A carbon tax is really no different.” Vitter introduced legislation earlier this year that would block the Obama Administration from regulating greenhouse gas emissions until China, India and Russia take similar actions. “China, India and Russia, some of the world’s largest carbon emitters, have not shackled their economies with burdensome regulations” like a carbon tax, Vitter said. 

Political Momentum on Tax Appears to Have Dried Up in Congress

The CBO report comes after most political momentum surrounding the prospect of a carbon tax appears to have dried up on Capitol Hill. Support for a carbon fee appeared to be growing among some policy circles in Washington last summer as a way to reduce the deficit and ease the nation away from the so-called ‘fiscal cliff’ at the time. But the White House and key members of both parties in Congress quickly backed away from the issue late last year after it became clear that it would be a big political lift in Congress to pass. Prominent Senate progressives Bernie Sanders (I-Vt.) and Barbara Boxer (D-Calif.) introduced legislation in February that would put in place a $20 price on carbon for the country’s 2,900 largest emitters, splitting revenues between deficit reduction, monthly rebates for ratepayers and clean energy investment schemes. However, that measure has not garnered much support from across the aisle to date. Some supporters, though, have expressed hope that the issue could reemerge later in 2013 as part of a broader tax reform effort in Congress.